Do the Math
A successful business is one that makes money. Even if you’re still figuring out how to turn a profit with your business, chances are you’ve been exposed to or involved in at least one project in the past. Use this past project as your base to figure out how much you would like to make off a new project. Did you or the team involved with the past project make enough profit?
Income minus your overhead costs equals profit. Although that equation seems simple enough, there are many factors to consider, and the numbers can be difficult to project, especially when you’re just starting out. But it’s not impossible. We recommend estimating these figures and applying them to a yearly analysis. How many projects would you want to take on in a year, realistically?
Let’s say that number is ten. Outline what you expect your total annual overhead costs will be for all projects, including anything you need to keep the business running: insurance, rent, trade groups, utilities, equipment costs and maintenance.
Add to this the job costs, such as materials, crew salary (including vacation pay or benefits), subcontractors, even gas. Overhead plus job costs gives you the yearly cost of doing business — the figure you’ll need to surpass in order to be profitable.
Divide this figure by ten, add on the amount or percent of profit you’d like to make, and you’ll have an estimated billable rate for each project. This rate can be used as a basis for an hourly rate pricing model, and for other models we will explore in coming series.
Discover all the pros and cons of a fixed rate pricing model, including how not to underestimate your worth.